The minimum wage is a legally established lower hourly wage limit. It does not refer to collectively bargained wages, although trade unions, as in Germany, can help to determine a minimum wage. A minimum wage is intended to improve the earnings situation of low-income groups in particular. Often, however, they are used to protect companies from their competitors. In addition to statutory minimum wages there is also an implicit minimum wage that can be established by the wage-replacement transfers of the social welfare state.
Whereas many European countries have comprehensive, statutory minimum wages, minimum wages tend to be the exception in Germany (see DICE: Statutory Gross Minimum Wages in Europe, 2006-2011). In Germany minimum wages do exist to the extent that the Federal Minister of Labour can, by means of a legal ordinance, declare collectively bargained wages to be generally binding. The employee posting law (see http://bundesrecht.juris.de) of 24 April 2009 is the legal basis by which minimum suitable working conditions for cross-border workers and for those regularly employed in the domestic economy can be created as well as fair and functioning conditions of competition. The prerequisites for the introduction of a minimum wage in an industry on the basis of the worker posing law is a collectively bargained wage agreement, which has been declared to be generally binding, containing a minimum wage for this industry and the mentioning of the industry in the ordinance.
There were minimum wages in Germany in the following industries in 2011 (see http://www.destatis.de): construction, painting and paintwork, electrical installation, roofers, waste management, mining, facility management and laundry services. The minimum wage currently lies between 6.53 and 13 euros.
In addition to the statutory minimum wages, there are also implicit minimum wages in Germany established by the wage-replacement transfers of the state (ALG I, ALG II, Social Welfare) and by early retirement benefits. These transfers establish a minimum wage claim (reservation wage) that must be offered in the private sector in order to successfully “recruit” workers from among social welfare recipients. The effect of the wage-replacement system is weakened to the extent that additional earnings are possible within the system of social transfers.
The introduction of a comprehensive minimum wage is highly controversial in Germany. The insistence that full-time employees must be rewarded with socially acceptable earnings is, on the surface, in accordance with a general concept of justice, but also bears considerable risks that contradict these very concerns of justice. Since wages determine labour costs, a minimum wage will likely lead to job losses in the low wage sector. A market economy has no mechanism that would create for low skilled workers sufficient jobs whose productivity is high enough to earn wages that would correspond to societal ideals of a just minimum income. The higher the wages for a qualification segment of the labour market, the lower is the number of jobs that can be offered by firms on profitable terms. If wages are fixed at a level that society considers to be a just minimum income, unemployment is inevitable.
Critics of this conclusion argue that minimum wages increase demand since they strengthen purchasing power. This argument is wrong since a wage increase is only a redistribution and not an expansion of purchasing power. Quite the contrary, if profitable jobs are destroyed or prevented from arising, minimum wages lower the income and thus also a country’s purchasing power.
Critics also object that minimum wages in labour markets in which workers are reliant on a single employer prevent exploitation and in some cases even increase employment since the incentive to reduce wages via lower employment is weakened. This argument finds little support among economists because it does not fit precisely for the low skilled. The lower qualified as a result of their lack of specialised training find even in the smallest location a larger number of employment possibilities among employers who compete for these people.
The optimum alternative for overcoming unemployment among the lower qualified lies in education, which urgently needs improvement in Germany. But before an improvement in education has repercussions on the labour market, one must wait a generation, and even then there could be still more lower qualified people than can be employed at the prevailing wages. If one strives for full employment and for giving everyone the chance to achieve self realisation via labour, there is no alternative to wage subsidies. Wage subsidies decouple labour costs from income and enable the goals of full employment and income assurance to be achieved at the same time. The motto coined by the Ifo Institute and also adopted by Chancellor Merkel is: “Whoever wants to work must be able to work and then have enough to live on.”
This motto also entails an affirmation of the Agenda 2010 reforms implemented by the government of Gerhard Schröder and his minister of labour and economics, Wolfgang Clement. These reforms at their core involve lowering the implicit minimum wage in the German wage replacement system and putting wage subsidies in its place, similar to what the Ifo Institute proposed in 2002 in its Activating Social Welfare proposal. (In the same year this received the support of the Advisory Council of the Federal Ministry of Economics, the German Council of Economic Experts and in part from the Hartz Commission). The implicit minimum wage in the German wage replacement system had been constantly expanded by the social reforms of the 1970s and 1980s, especially by the strong increase in the rates of social benefits and the introduction of unemployment assistance. In light of the increasing competitive pressure from low-wage countries and the migration of lower qualified people from these countries, it led to an ominous mass unemployment among the low skilled that was higher than in any other OECD country. With the Agenda 2010 reforms, the implicit minimum wage was lowered by eliminating unemployment assistance and by introducing wage subsidies (also known as topping-off amounts or additional earnings possibilities) via the social welfare system under the name ALG II. This strengthened the low-wage sector in Germany without poverty arising. Since the Agenda 2010 reforms, no worker in Germany must get by solely on wages earned. If wages are not sufficient, the state provides a wage subsidy which increases total income clearly above the level of social welfare (Hartz IV). These reforms led to the creation of a million more jobs in western Germany alone during the last economic upswing than would have been expected during a cyclical upturn, and Germany withstood the 2009 recession better than most Western countries.
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Sinn, Hans-Werner, "Von einem Mindestlohn, den man nicht bekommt, kann man nicht leben: Ein Plädoyer für den besseren Sozialstaat", ifo Schnelldienst 61 (06), 2008, 57-61 Article in journal | Details | Download (PDF, 351 KB)
ifo Schnelldienst 06/2008 Sonderausgabe: "Mindestlohn: Für und Wider" (2008), München, ifo Institut für Wirtschaftsforschung Journal issue | Details | Content page | Download (PDF, 6369 KB)
Ochel, Wolfgang, "Tarifliche Mindestlöhne, Allgemeinverbindlichkeit und Entsenderichtlinie in Europa", ifo Schnelldienst 61 (04), 2008, 19-24 Article in journal | Details | Download (PDF, 345 KB)
Sinn, Hans-Werner, "Eine Anmerkung zur Reallohnentwicklung in Deutschland", ifo Schnelldienst 60 (19), 2007, 23-26 Article in journal | Details | Download (PDF, 887 KB)
Ragnitz, Joachim und Marcel Thum, "The empirical relevance of minimum wages for the low-wage sector", CESifo Forum 8 (2), 2007, 35-37 Article in journal | Details | Download (PDF, 262 KB)
Thum, Marcel and Joachim Ragnitz, "Zur Einführung von Mindestlöhnen: Empirische Relevanz des Niedriglohnsektors", ifo Schnelldienst 60 (10), 2007, 33-35 Article in journal | Details | Download (PDF, 189 KB)
Sinn, Hans-Werner, Christian Holzner, Wolfgang Meister, Wolfgang Ochel and Martin Werding, "Aktivierende Sozialhilfe - Ein Weg zu mehr Beschäftigung und Wachstum", ifo Schnelldienst 55 (09), 2002, 03-52 Article in journal | Details | Download (PDF, 3001 KB)
Sinn, Hans-Werner, „Mindestlöhne unterminieren die Gesellschaft“, Süddeutsche Zeitung, 1 April 2008, No. 76, p. 22 | Text
Sinn, Hans-Werner, „Der dümmste Spruch des Jahres“, Süddeutsche Zeitung, 28 December 2007, No. 298, p. 2 | Text
Statutory Gross Minimum Wages in Europe, 2006-2011 (Table | 01.01.2011 | Details | Download)
AW Earnings and Statutory Minimum Wage, 2005 (Table | 01.06.2008 | Details | Download)
Ifo Policy Issue: Minimum Wage
Ifo Policy Issue: Low Wage Employment / Welfare to Work
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